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Articles of Incorporation

1. Nature of Charter
a. Commencement of Corporate Existence
i. Section 19. Commencement of corporate existence. - A private corporation formed or
organized under this Code commences to have corporate existence and juridical
personality and is deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal; and thereupon the
incorporators, stockholders/members and their successors shall constitute a body politic
and corporate under the name stated in the articles of incorporation for the period of time
mentioned therein, unless said period is extended or the corporation is sooner dissolved
in accordance with law. (n)
2. Procedure and Documentary Requirements
Section 14. Contents of the articles of incorporation. - All corporations organized under this code shall
file with the Securities and Exchange Commission articles of incorporation in any of the official
languages duly signed and acknowledged by all of the incorporators, containing substantially the
following matters, except as otherwise prescribed by this Code or by special law:
1. The name of the corporation;

2. The specific purpose or purposes for which the corporation is being incorporated. Where a
corporation has more than one stated purpose, the articles of incorporation shall state which
is the primary purpose and which is/are the secondary purpose or purposes: Provided, That
a non-stock corporation may not include a purpose which would change or contradict its
nature as such;

3. The place where the principal office of the corporation is to be located, which must be within
the Philippines;

4. The term for which the corporation is to exist;


4. The names, nationalities and residences of the incorporators;


 6. The number of directors or trustees, which shall not be less than five (5) nor more than
fifteen (15);

7. The names, nationalities and residences of persons who shall act as directors or trustees
until the first regular directors or trustees are duly elected and qualified in accordance with this
Code;

8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the
Philippines, the number of shares into which it is divided, and in case the share are par value
shares, the par value of each, the names, nationalities and residences of the original
subscribers, and the amount subscribed and paid by each on his subscription, and if some or all
of the shares are without par value, such fact must be stated;

9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and
residences of the contributors and the amount contributed by each; and

10. Such other matters as are not inconsistent with law and which the incorporators may deem
necessary and convenient.

The Securities and Exchange Commission shall not accept the articles of incorporation of any
stock corporation unless accompanied by a sworn statement of the Treasurer elected by the
subscribers showing that at least twenty-five (25%) percent of the authorized capital stock of the
corporation has been subscribed, and at least twenty-five (25%) of the total subscription has
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been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at
least twenty-five (25%) percent of the said subscription, such paid-up capital being not less than
five thousand (P5,000.00) pesos.

a. As to Number and Residency of Incorporators

Section 10. Number and qualifications of incorporators. - Any number of natural persons not
less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of
the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the
incorporators of s stock corporation must own or be a subscriber to at least one (1) share of the capital
stock of the corporation. (6a)

b. Corporate Name

Section 18. Corporate name. - No corporate name may be allowed by the Securities and
Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of
any existing corporation or to any other name already protected by law or is patently deceptive,
confusing or contrary to existing laws. When a change in the corporate name is approved, the
Commission shall issue an amended certificate of incorporation under the amended name. (n)

Section 14. Contents of the articles of incorporation. - All corporations organized under this
code shall file with the Securities and Exchange Commission articles of incorporation in any of the
official languages duly signed and acknowledged by all of the incorporators, containing substantially the
following matters, except as otherwise prescribed by this Code or by special law:

1. The name of the corporation;

Section 42. Power to invest corporate funds in another corporation or business or for any other
purpose. - Subject to the provisions of this Code, a private corporation may invest its funds in any other
corporation or business or for any purpose other than the primary purpose for which it was organized
when approved by a majority of the board of directors or trustees and ratified by the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of
the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called
for the purpose. Written notice of the proposed investment and the time and place of the meeting shall
be addressed to each stockholder or member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid, or served
personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this
Code: Provided, however, That where the investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of incorporation, the approval of the
stockholders or members shall not be necessary. (17 1/2a)

GSIS Family Bank v. BPI Family


Facts:
 Petitioner was originally organized as Royal Savings Bank and started operations in 1971
o Petitioner encountered liquidity problems and was placed under receivership
o It was temporarily closed by the Central Bank. 2 months after its closure, petitioner reopened
and was renamed Comsavings Bank, Inc. under the management of the Commercial Bank of
Manila
o GSIS acquired petitioner from Commercial Bank of Manila. Thus petitioner’s management and
control was thus transferred to GSIS

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o To improve the bank’s marketability to the public, especially to the members of the GSIS,
petitioner sought the SEC’s approval to change its corporate name to “GSIS Family Bank, a
Thrift Bank”
o Petitioner likewise applied to the DTI and the BSP for authority to use “GSIS Family Bank, a
Thrift Bank” as its business name. DTI and BSP approved the applications. Thus petitioner
operates under the corporate name “GSIS Family Bank—a Thrift Bank”
 Respondent BPI was a a product of the merger between the Family Bank and Trust Company (FBTC)
and the BPI
o The Gotianum family registered with the SEC the corporate name “Family First Savings Bank”
which amended to “Family Savings Bank” and then later to “Family Bank and Trust Company”
o Since its incorporation, the bank has been commonly known as “Family Bank.” Family Bank
merged with BPI, and the latter acquired all the rights, privileges, properties and interests of
Family Bank including the right to use names, such as “Family First Savings Bank”, “Family
Bank”, and “Family Bank and Trust Company”
o BPI Family Savings Bank was registered with the SEC as a wholly-owned subsidiary of BPI. BPI
then registered with the Bureau of Domestic Trade the trade or business name of “BPI Family
Bank” and acquired a reputation and goodwill under the name
 BPI learned that petitioner is using or attempting to use the name “Family Bank” thus the former
petitioned the SEC Company Registration and Monitoring Department (SEC CRMD) to disallow or
prevent the registration of the name “GSIS Family Bank” or any other corporate name with the words
“Family Bank” in it
o Respondent also alleged that through the years, it has acquired a reputation and goodwill under
the name, not only with clients here and abroad, but also with correspondent and competitor
banks, and the public in general
 SEC CRMD ruled in favor of BPI saying that the latter acquired the right to use of the name of the
absorbed corporation. Thus BPI Family Bank has a prior right to the use of the name
o Family Bank in the banking industry had a long and extensive nationwide use
o Family Bank was registered with the IPO as its trade name
o Applying the rule “priority in registration” the SEC CRMD concluded that BPI has the preferential
right to the use of the name “Family Bank:
o GSIS and Comsavings Bank were then fully aware of the existence and use of the name Family
Bank by FBTC prior to the latter’s merger with BPI
o It also held that there exists a confusing similarity between the corporate names BPI Family
Bank and GSIS Family Bank. Although not identical, the corporate names are indisputably
similar, especially so since both corporations are engaged in the banking business
 CA ruled that the approvals of the BSP and DTI of petitioner’s application to use the name “GSIS
Family Bank” do not constitute authority for its lawful and valid use
o It said that the SEC has absolute jurisdiction, supervision and control over all corporations
o The CA held that respondent was entitled to the exclusive use of the corporate name because
of its prior adoption of the name Family Bank since 1969

Issue: Whether the approval of DTI and BSP regarding petitioner’s use of the name “Family Bank” is
authoritative—No

Held:
 Sec. 18 Corporate Name—No corporate name may be allowed by the SEC if the proposed name
is identical or deceptively or confusingly similar to that of any existing corporation or to any
other name already protected by law or is patently deceptive, confusing or contrary to existing
laws. When a change in the corporate name is approved, the Commission shall issue an
amended certificate of incorporation under the amended name
 Philips Export B.V.: Court ruled that to fall within the prohibition of the law on the right to
exclusive use of a corporate name, two requisites must be proven:
o The complainant corporation acquired a PRIOR RIGHT over the use of such corporate
name
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o The proposed name is either:
 Identical; or
 Deceptive or confusingly similar to that of any existing corporation or to any other
name already protected by law; or
 Patently deceptive, confusing or contrary to existing to law
 The two requisites are present in this case
o First requisite: respondent was incorporated in 1969 as Family Savings Bank and in 1985 as
BPI Family Bank. GSIS on the other hand, was incorporated as GSIS Family Bank—Thrift Bank
only in 2002 or at least 17 years after respondent started using its name
o Second Requisite:
 The words “Family Bank” present in both petitioner and respondent’s name satisfy the
requirement that there be in identical names in the existing corporate name and the
proposed one
 The petitioner’s use of the words “GSIS” and “thrift” are not sufficient to differentiate
petitioner’s corporate name from respondents
 GSIS is merely an acronym of petitioner
 “thrift” is a classification of the type of bank that petitioner is
o still confusing because both parties are engaged in the banking business
 There is also deceptive and confusing similarity between petitioner’s proposed name
and respondent’s corporate name as found by the SEC
 TEST: whether the similarity is such as to mislead a person using ordinary
care and discrimination
o Even without such actual proof of confusion, it suffices that confusion is
probable or likely to occur
 In the case at bar…
 Respondent alleged that upon seeing Comsavings Bank branch with the signage
“GSIS Family Bank” displayed at the premises, some of the respondents officers
and their clients began asking questions
o Whether GSIS had acquired Family Bank
o Whether there is a joint agreement between BPI and GSIS regarding
Family Bank
o Whether there is an agreement among Comsavings Bank, GSIS, BPI and
Family Bank regarding BPI Family Bank and GSIS Family Bank
 Findings of fact of quasi-judicial agencies like the SEC are generally accorded respect and even
finality by this Court if supported by substantial evidence in recognition of their expertise on the
specific matters under their consideration, more so it the same has been upheld by the
appellate court
 Petitioner’s argument that the opinion of the BSP and the certificate of registration granted to it by the
DTI constitute authority for it to use “GSIS Family Bank” as corporate name is also untenable
o The enforcement of the protection accorded by Sec. 18 of the Corporation Code to
corporate names is lodged exclusively in the SEC
o The jurisdiction of the SEC is not merely confined to the adjudicative functions provided
in Sec. 5 of the SEC Reorganization Act
o By express mandate, the SEC has absolute jurisdiction, supervision and control over all
corporations
o It is the SEC’s duty to prevent confusion in the use of corporate names not only for the
protection of the corporations involved, but more so for the protection of the public
o It has authority to de-register at all times and under all circumstances corporate names
whit in its estimation are likely to generate confusion
 In the case at bar…
o The SEC correctly applied Sec. 18 of the Corp Code and Sec. 15 of SEC Memo Circular No 14-
2000
 Registrant corporation or partnerships shall submit a letter undertaking to change
their corporate or partnership name in case another person or firm has acquired a
FLAMENOTES: CORPORATION LAW- ATTY. HOFILENA 4
prior right to the use of the said firm name or the same is deceptively or
confusingly similar to one already registered unless this undertaking is already
included as one of the provisions of the AOI or partnership of the registrant
o The SEC, after finding merit in respondent’s claims, can compel petitioner to abide by its
commitment to change its corporate name in the event that another person, firm, or entity has
acquired a prior right to use of said name or one similar to it
 NOTES:
o “Family” as used in respondent’s name is NOT generic
 Generic Marks: commonly used as the name or description of a kind of goods
 Descriptive Marks: convey the characteristics, functions, qualities or ingredients
of a product to one who has never seen it or does not know if it exists
o The word “family” cannot be separated from the word “bank”
 In asserting their claims before the SEC up to the CA, both petitioner and respondent
refer to the phrase “Family Bank” in their submissions – such is regarded as an Arbitrary
Mark
 Arbitrary Mark: words or phrases used as a make that appear to be random in the
context of its use; they are generally considered to be easily remembered because
of their arbitrariness
o In the case at bar…
 There can be no expected relation between the word family and the banking business.
Rather the words suggest that respondent’s bank is where family savings should be
deposited

c. Purpose Clauses

Section 14. Contents of the articles of incorporation. - All corporations organized under this
code shall file with the Securities and Exchange Commission articles of incorporation in any of the
official languages duly signed and acknowledged by all of the incorporators, containing substantially the
following matters, except as otherwise prescribed by this Code or by special law:

2. The specific purpose or purposes for which the corporation is being incorporated.
Where a corporation has more than one stated purpose, the articles of incorporation shall state
which is the primary purpose and which is/are the secondary purpose or purposes: Provided,
That a non-stock corporation may not include a purpose which would change or contradict its
nature as such;

d. Corporate Term

Section 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years
from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate
term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty
(50) years in any single instance by an amendment of the articles of incorporation, in accordance with
this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or
subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be
determined by the Securities and Exchange Commission. (6)

e. Principal Place of Business

Section 51. Place and time of meetings of stockholders of members. - Stockholder's or


member's meetings, whether regular or special, shall be held in the city or municipality where the
principal office of the corporation is located, and if practicable in the principal office of the corporation:
Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality.

FLAMENOTES: CORPORATION LAW- ATTY. HOFILENA 5


Notice of meetings shall be in writing, and the time and place thereof stated therein.

All proceedings had and any business transacted at any meeting of the stockholders or members, if
within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or
called, provided all the stockholders or members of the corporation are present or duly represented at
the meeting. (24 and 25)

f. Minimum Capitalization

Section 12. Minimum capital stock required of stock corporations. - Stock corporations
incorporated under this Code shall not be required to have any minimum authorized capital stock
except as otherwise specifically provided for by special law, and subject to the provisions of the
following section

g. Subscription and Paid-Up Requirements

Section 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. - At least twenty-five percent (25%) of the authorized capital stock as stated in the
articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%)
per cent of the total subscription must be paid upon subscription, the balance to be payable on a date
or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or
dates, upon call for payment by the board of directors: Provided, however, That in no case shall the
paid-up capital be less than five Thousand (P5,000.00) pesos. (n)

3. Grounds for Disapproval

Section 17. Grounds when articles of incorporation or amendment may be rejected or


disapproved. - The Securities and Exchange Commission may reject the articles of incorporation or
disapprove any amendment thereto if the same is not in compliance with the requirements of this Code:
Provided, That the Commission shall give the incorporators a reasonable time within which to correct or
modify the objectionable portions of the articles or amendment. The following are grounds for such
rejection or disapproval:

1. That the articles of incorporation or any amendment thereto is not substantially in accordance with
the form prescribed herein;

2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or
contrary to government rules and regulations;

3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid is false;

4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has
not been complied with as required by existing laws or the Constitution.

No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-


banking institutions, building and loan associations, trust companies and other financial intermediaries,
insurance companies, public utilities, educational institutions, and other corporations governed by
special laws shall be accepted or approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect that such articles or amendment is
in accordance with law. (n)

FLAMENOTES: CORPORATION LAW- ATTY. HOFILENA 6


4. Amendments to the AOI

Section 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed by this Code
or by special law, and for legitimate purposes, any provision or matter stated in the articles of
incorporation may be amended by a majority vote of the board of directors or trustees and the
vote or written assent of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code, or the vote or written assent of at least two-thirds
(2/3) of the members if it be a non-stock corporation.

The original and amended articles together shall contain all provisions required by law to be set
out in the articles of incorporation. Such articles, as amended shall be indicated by underscoring
the change or changes made, and a copy thereof duly certified under oath by the corporate
secretary and a majority of the directors or trustees stating the fact that said amendment or
amendments have been duly approved by the required vote of the stockholders or members,
shall be submitted to the Securities and Exchange Commission.

The amendments shall take effect upon their approval by the Securities and Exchange
Commission or from the date of filing with the said Commission if not acted upon within six (6)
months from the date of filing for a cause not attributable to the corporation.

By-Laws

1. Nature, Function and Contents

Section 47. Contents of by-laws. - Subject to the provisions of the Constitution, this Code, other special laws,
and the articles of incorporation, a private corporation may provide in its by-laws for:

1. The time, place and manner of calling and conducting regular or special meetings of the directors or
trustees;

2. The time and manner of calling and conducting regular or special meetings of the stockholders or members;

3. The required quorum in meetings of stockholders or members and the manner of voting therein;


4. The form for proxies of stockholders and members and the manner of voting them;

5. The qualifications, duties and compensation of directors or trustees, officers and employees;


6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice
thereof;


 7. The manner of election or appointment and the term of office of all officers other than directors or
trustees;


8. The penalties for violation of the by-laws;


 9. In the case of stock corporations, the manner of issuing stock certificates; and


10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business
and affairs. (21a)
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Gokongwei v. SEC
Facts:
 2 cases were filed in this case by petitioner (yung 1st case lang yung relevant sa topic)
 petitioner as stockholder of respondent San Miguel Corporation (SMC), filed with the SEC a petition for
“declaration of nullity of amended by-laws, cancellation of certificate of filing of amended by-laws,
injunction and damages with prayer for a preliminary injunction” against the majority members and BOD
of SMC
o petition was entitled Gokongwei v. Soriano et al
 Petitioner’s Allegations (IMPORTANT):
o 1976—petitioner alleged that individual respondents amended the by-laws of the corporation
basing their authority to do so on a resolution of the stockholders adopted on March 13, 1961
(yung 1961 resolution had the effect of giving the BOD the power to amend the by-laws by
themselves)
o One of the contentions of petitioners was that according to Sec 22 of the Corp Law and Article
VIII of the by-laws of SMC, the power to amend, modify, repeal or adopt new by-laws may be
delegated to the BOD only by the affirmative vote of stockholders representing not less thatn 2/3
of the subscribed capital stock of the corporation, which 2/3 should have been computed on the
basis of capitalization at the time of amendment
 Since the amendment was based on the 1961 authorization, petitioner contended the
Board acted without authority and in usurpation of the power of stockholders (contention
niya yung 1961 authorization void kasi yung amendment did not use capitalization as the
basis of the computation for voting)
o Prior to the amendment, petitioner had all the qualification to be a director of respondent
corporation, being a Substantial stockholder thereof; that as a stockholder, petitioner
had acquired the rights inherent in stock ownership
 In amending the by-laws, petitioner alleges that respondents purposely provided
for petitioner’s disqualification and deprived him of his VESTED RIGHT to be
voted for in elections hence the amended by-laws are null and void
 Petitioner alleged that corporations have no inherent power to disqualify a
stockholder from being elected as a director and, therefore the questioned act is
ultra vires and void
 That the amendment which gave the Board the prerogative of determining whether
they or other persons are engaged in competitive or antagonistic business was
invalid
 Such amendment allowed the board to consider factors such as business
and family relationship making it, as alleged, unreasonable and oppressive
 Petitioner filed with SEC an Urgent Motion alleging that the Secretary of the corporation refused to
allow him to inspect its records despite the request made by petitioner for production of certain
documents. Petitioner alleges that SMC had been attempting to suppress information from its
stockholders
 SMC’s Defense: (on the relevant issue)
o The amendments were valid and legal because the power to amend and modify the by-laws
were delegated to the Board in the 1961 Meeting and long prior thereto has never been revoked
by the SMC
o The vote requirement for a valid delegation of the power to amend and modify is determined in
relation to the total subscribed capital stock at the time of delegation of said power is made,
NOT when the Board opts to exercise said delegated power
o Petitioner is also estopped from questioning the amendments, since he failed to object to other
amendments on the basis of the same 1961 authorization
o The power of the corporation to amend its by-laws is broad, subject only to the condition that the
by-laws adopted should not be inconsistent with any law
o SMC should not be precluded from adopting protective measures to minimize or eliminate
situations where its directors might be tempted to put their personal interests over that of the
corporation
FLAMENOTES: CORPORATION LAW- ATTY. HOFILENA 8
o That the questioned amended by-laws is a matter of internal policy and judgment of the board
and should not be interfered with
o That the amended by-laws are valid and binding and are intended to prevent the possibility of
violation of criminal and civil laws prohibiting combinations in restraint of trade
 SEC resolved the Urgent Motion allowing only a few documents to be inspected by petitioner. Petitioner
filed MR
 While the MR was being heard SMC issued a notice of special stockholders’ meeting for the purpose of
ratification and confirmation of the amendment to the by-laws. This prompted the petitioner to ask the
SEC for a summary judgment and a TRO
 SEC denied the motion for a TRO. SMC conducted the meeting wherein the amendments were ratified
 In view of the annual stockholders’ meeting of SMC had been scheduled for May 10, 1977, petitioner
filed with respondent Commission a Manifestation stating that he intended to run for the position of
director of SMC
o Respondents filed a Manifestation with the SEC submitting a Resolution of the BOD of SMC
disqualifying and precluding petitioner form being a candidate unless he can submit evidence
that he does not come within the disqualifications of the by-laws
 Petitioner was not heard prior to the date of the stockholders’ meeting for the elections.
 Hence, petitioner now alleges that SEC deliberately and in connivance with SMC did not act upon the
motions of petitioner

Issue: Whether the amended by-laws, disqualifying petitioner to be voted for in the BOD elections, valid—Yes

Held:
 The validity or reasonableness of a by-law of a corporation is purely a question of law
o Whether the by-law is in conflict with the law of the land, or with the charter of the
corporation, or is in a legal sense unreasonable and therefore unlawful is a question of
law
 Petitioner’s Claim:
o The amended by-laws were tailored to suppress the minority and prevent them from having
representation in the Board (minority siya kasi PERSONALLY 4% of the outstanding stock lang
hawak niya at that time) and at the same time depriving him of his vested right to be voted for
and to vote for a person of his choice as director
 SMC’s Defense:
o The exclusion of a competitor from the BOD is a legitimate corporate purpose, considering that
being a competitor, petitioner cannot devote an unselfish and undivided loyalty to the
corporation
o The amendment was a preventive measure to protect its stockholders
o Allowing competitors to sit in the BOD would lead to access to confidential information which
may result in either:
 Promotion of the interest of the competitor at the expense of SMC
 Promotion of both their interests in violation of the law against combinations
o ITO YUNG BREAKDOWN NG OWNERSHIP TOTAL OUTSTANDING STOCK:
 GOKONGWEI—6K shares (4%)
 Universal Robina—738k shares
 CFC Corporation—658K shares
o SMC alleges that petitioner is the president and substantial stockholder of both URC and
CFC Corporation, both of which are allegedly controlled by petitioner and members of
his family directly and substantially competing with the alleged business of SMC and of
corporation in which has substantial investments
 MAIN DOCTRINE: Every corporation has the inherent power to adopt by-laws for its internal
government and to regulate conduct and prescribe the rights and duties of its members towards
itself and among themselves in reference to the management of its affairs
o The power to make and adopt by-laws is INHERENT in every corporation as one of its
necessary and inseparable legal incidents
FLAMENOTES: CORPORATION LAW- ATTY. HOFILENA 9
o In the absence of positive legal provisions limiting it, every private corporation has this inherent
power as one of its necessary and inseparable legal incidents, independent of any specific
enabling provision in its charter or in general law, such power of self-government being
essential to enable the corporation to accomplish the purposes of its creation
 Sec. 21 of the Corp Code:
o A corporation may prescribe in its by-laws the qualification, duties, and compensation of
directors, officers and employees
o This is an addition to the qualification set in Sec. 30 which requires a director, officer and
employee to own at least one share of the capital stock of the stock corporation of which
he is a director
 NO VESTED RIGHT TO BE ELECTED DIRECTOR
o A person who buys stock in a corporation does so with the knowledge that its affairs are
dominated by a majority of the stockholders and he impliedly contracts that the will of the
majority shall govern in all matters within the limits of the act of incorporation and lawfully
enacted by-laws and not forbidden by law
o Sec 18: any corporation may amend its AOI by a vote or written assent of the
stockholders representing at least 2/3 of the subscribed capital stock of the corporation
if the amendment changes, diminishes or restricts the rights of existing shareholders
then the dissenting minority has only 1 right: “to object thereto in writing and demand
payment for his share” (APPRAISAL RIGHT)
o Sec. 22: owners of the majority of the subscribed capital stock may amend or repeal any
by-law or adopt new by-laws
 A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS
SHAREHOLDERS
o The directors are agents entrusted with the management of the corporation for the collective
benefit of the stockholders
o Directors have the control and guidance of corporate affairs and property and hence of the
property interests of stockholders
o Equity recognizes that stockholders are the proprietors of the corporate interests and are
ultimately the only beneficiaries thereof
 RELEVANT ISSUE: AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A
STOCKHOLDER INELIGIBLE TO BE A DIRECTOR, IF HE IS ALSO A DIRECTOR IN A
CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER
CORPORATION, IS VALID
o Corporation have the power to make by-laws declaring a person employed in the service of a
rival company to be ineligible for the corporation’s BOD
o This based upon the principle that the where the director is so employed in the service of a rival
company, he cannot serve both, but must betray one or the other—such an amendment
benefits the corporation and is good
o Corporate officers are NOT permitted to use their position of trust and confidence to further their
private interests
o Doctrine of Corporate Opportunity
 A recognition that the fiduciary standards could not be upheld where the fiduciary
was acting for 2 entities with competing interests
 In the case at bar…
o A member of the BOD of SMC has access to sensitive and highly confidential information such
as:
 Marketing strategies and pricing
 Budget for expansion and diversification
 Research and development
 Sources of funding
o Therefore, the amendment was obviously to prevent the creation of an opportunity for an officer
or director of SMC, who is also the officer or owner of a competing corporation from taking
FLAMENOTES: CORPORATION LAW- ATTY. HOFILENA 1
0
advantage of the information which he acquires as director to promote his individual or
corporate interests to the prejudice of SMC and its stockholders, that the questioned
amendment of by-laws was made
o Further, this amendment was also to prevent the creation of a combination which is prohibited
by the Constitution and penal laws
 The election of petitioner can bring about an illegal situation, because an express
agreement is not necessary for the existence of a combination or conspiracy in restraint
of trade
 It is enough that a concert of action is contemplated and that the defendants conformed
to the arrangements and what is to be considered is what the parties actually did and not
the words they used

Ching v. Quezon City Sports Club


Facts:
 The Club is a duly registered domestic corporation providing recreational activities, sports facilities, and
exclusive privileges and services to its members
 Petitioner Catherine became a member and regular patron of the Club. Per policy of the Club,
membership privileges were extended to her immediate family
 1999—the NLRC rendered a Decision holding the Club liable to pay its illegally dismissed employees.
The said decision became final and executor and a writ of execution was issued against the Club
 The Club was not in a financial condition that will allow it to pay the monetary awards
o The BOD issued Resolution 7-2001 which sought assistance from the Club’s members by
assessing each one of them the amount of P2,500 payable in 5 equal monthly installments
 Petitioner Catherin was duly notified of the implementation of the special assessment through a Letter
from the Treasurer of the Club. The amount of P500 was debited and/or charged to Catherine’s
account each month as reflected in the Statements of Account
o Petitioner Catherine believed that the said resolution was unjust and illegal; she took no
action and simply avoided paying the special assessment
 The BOD issued Resolution 3-2002 which suspended the privileges of members who had not yet paid
the special assessment
 Catherine continued to avail herself of the services of the Club and regularly paid the amounts due but
always leaving behind the special assessment of 500 pesos
 Laurence, child of Catherine, went to the Club to avail of the services but was denied
o The Club refused because his mother’s membership privileges had been suspended
 The finance manager of the club gave Catherine copies of the said resolutions
 When Catherine went to the Club, she allegedly saw her name included and highlighted in the finance
manager’s memorandum posted in conspicuous places
 Catherine, through counsel, demanded that immediate recall of the suspension of her membership
privileges. The Club denied this
 To avail of the Club’s services in the meantime, she would visit as a guest using the membership of her
other family members. She paid more than double her customary fees to enjoy the services
 A few days after, however, Catherine was refused access to the Club even as a mere guest and to lift
the suspension she paid under protest the assessment of P2,500
 Catherine filed a complain for damages in the RTC
o She alleged that even though she paid the assessment, respondents kept harassing her; the
guard would monitor her movements; and management order her tennis coach to stop playing
with petitioner
o She also informed the court that the BOD issued a resolution in which they resolved to expel
Catherine as a regular member of respondent Club due to her filing of civil suit against
respondent
 RTC ruled in favor of the Petitioner ordering the Club to pay her moral damages

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o The court ruled that respondents failed to comply with its by-laws when it required prior notice
and hearing before the suspension of membership privileges (Sec. 35 of the by-laws)
o It also ruled that the respondents acted in bad faith in depriving the petitioner her membership
privileges after she had already paid her assessment
 CA ruled in favor of the Club
o Sec 33(a) of the by-laws was the applicable provision which allowed automatic suspension of a
membership’s privileges after notice, BUT WITH NO NEED FOR A HEARING
o The notice was given via the Statement of Accounts sent to Petitioner
o There was no bad faith or intent to humiliate the Petitioner

Issue: Whether the CA erred in ruling that the suspension of petitioner can be made under Sec. 33(a) of the
by-law—Yes; Whether the Club is liable for moral damages—No

Held:
 The articles of incorporation and by-laws of country club are the fundamental documents
governing the conduct of the corporate affairs of said club
o They establish the conduct of the corporate affairs of said club;
o They establish the norms of procedure for exercising the rights and reflected the
purposes and intentions of the incorporators
o These are self-imposed rules resulting from the agreement between the country-club and
its members to conduct the corporate business in a particular way
o It is a binding contract as between the country club and its members and as among the
members themselves
 PREVAILING RULE: provisions of the AOI and the by-laws are strictly complied with and applied
to the letter
 In the case at bar…
o Sec. 33(a) of the by-laws refers to the regular dues and ordinary accounts or bills incurred by
members as they avail of the services at respondent Club and for which the members are
charged in their monthly Statement of Account
 Essential to carry-on the operations of the Club
 HOWEVER, the P2,500 special assessment was NOT an ordinary account or bill
therefore Sec. 33(a) is NOT APPLICABLE
o The special assessment arose from an extraordinary circumstance—the necessity of raising
payment for the monetary judgment against respondent Club in an illegal dismissal case
o Sec. 35(a) is applicable!
 Requires notice and hearing prior to a member’s suspension
 In the case at bar..
 Catherine did not receive notice specifically advising her that she could be
suspended for nonpayment of special assessment
 The Club merely relied on the general notice printed in Catherine’s Statement of
Account warning her of automatic suspension
 NONETHELESS, such circumstance would not change the fact that Catherine knew of the special
assessment when it was issued via BOD resolution and Catherine simply chose not to pay the same
o Whatever reason Catherine might have against the special assessment would not change the
fact of her nonpayment thus there was a ground for the suspension of her membership
privileges
 There was also NO BAD FAITH in this case
o Petitioner failed to establish the existence of bad faith in the posting of the Memo with her name
in the Club
 Such were posted only in the cubicles of the clerk who were the front line employees
tasked to determine if a member is compliant with his/her duties to the Club
 The posting was for its day to day operations

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 It was not proven that indeed her name was highlighted and the posting was intended to
humiliate her
 In the end Club is not liable for moral damages but for nominal damages

a. Adoption Procedure for By-Law

Section 46. Adoption of by-laws. - Every corporation formed under this Code must, within one (1) month after
receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange
Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of
by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the
outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be
necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in
the principal office of the corporation, subject to the inspection of the stockholders or members during office
hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary
of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the
original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to
incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted
to the Securities and Exchange Commission, together with the articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of
a certification that the by-laws are not inconsistent with this Code.

The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of
any bank, banking institution, building and loan association, trust company, insurance company, public utility,
educational institution or other special corporations governed by special laws, unless accompanied by a
certificate of the appropriate government agency to the effect that such by-laws or amendments are in
accordance with law. (20a)

Bernas v. Cinco

Facts:

 Makati Sports Club (MSC) is a domestic corporation duly organized and existing under Philippine laws
for the primary purpose of establishing, maintaining, and providing social, cultural, recreational and
athletic activities among its members
 Because of rumored anomalies in handling the corporate funds, the MSC Oversight Committee
(MSCOC) demanded from the Bernas Group (incumbent officer of the corporation) to resign from their
respective positions to pave the way for the election of new sets officers
o MSCOC’s demand was backed up by the stockholder’s of the corporation representing at least
100 shares who sough the assistance of MSCOC to call for a special stockholders meeting for
the purpose of removing the sitting officers and electing new ones
 MSCOC called a Special Stockholders’ Meeting and sent out notices to all stockholders and members
stating therein the time, place and purpose of the meeting
 The Bernas Group failed to secure an injunction from the SEC, thus the meeting proceeded
o The meeting resulted in the removal of the Bernas Group from office and in their place the
Cinco group were elected
 The Bernas Group initiated an action before the SEC Investigation and Clearing Department (SICD) of
the SEC seeking for the nullification of the December 17, 1997 Stockholders’ Meeting on the ground
that it was improperly called
o Bernas Group cited Sec 28 of the Corp Code: authority to call a meeting lies with the Corporate
Secretary and NOT with the MSCOC which functions were merely as an oversight body and is
FLAMENOTES: CORPORATION LAW- ATTY. HOFILENA 1
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NOT VESTED to call corporate meetings
 The Cinco Group, on the other hand, insisted that the 1997 Stockholders’s Meeting is sanctioned by the
Corp Code and the MSC By-Laws
o Sec. 25 of the MSC by-laws merely authorized the Corporate Secretary to issue notices of
meetings and nowhere does it state that such authority solely belongs to him
o It was alleged that it was useless to course the request to call for a meeting thru the Corp Sec.
because he repeatedly refused to call a special stockholders’ meeting despite demands
 The Cinco Group, as newly elected directors, initiated an investigation on the alleged anomalies
o Cinco Group found Bernas guilty of irregularities; the Board resolved to expel him from the club
by selling his shares in a public action
o Bernas’ shares was sold for P902K to the highest bidder
 Prior to the resolution of the case in the SEC, the 1998 Annual Stockholders’ Meeting was held
o The said meeting ratified the 1997 Meeting expelling the Bernas from MSC and the sale of his
shares in the auction
 SEC En Banc then supervised the 1999 Annual Stockholders’ Meeting
o During the said meeting, once again the expulsion of Bernas and the sale of his shares were
ratified by the stockholders
o A Stockholders’ Meeting was also held in 2000 which again ratified the acts
 The SICD rendered a decision holding that the 1997 Stockholders’ Meeting and the Annual
Stockholders’ Meeting in 1998 and 1999 were INVALID; SICD nullified the expulsion of Bernas and the
sale of his shares
 SEC En Banc REVERSED the SICD and validated the Meetings
 CA again REVERSED the SEC En Banc

Issue: Whether the 1997 Special Stockholder’s Meeting is valid—No; Whether the subsequent Meetings had
the effect of ratifying the said special meeting—No

Held:

 The Corp Code laid down the rules on the removal of the Directors of the corporation by
providing the persons authorized to called the meeting and the number of votes required:
o Sec. 28 Removal of directors or trustees—x x x by a vote of the stockholders holding or
representing at least 2/3 of the outstanding capital stock x x such removal shall take
place either at a regular meeting of the corporation or at a special meeting called for the
purpose x x x must be called by the secretary on order of the president or on the written
demand of the stockholders representing or holding at least a majority of the
outstanding capital stock x x should the secretary fail or refuse to call the special
meeting upon such demand or fail or refuse to give the notice, or if there is no secretary,
the call for the meeting may be addressed directly to the stockholders or embers by any
stockholder or member of the corporation signing the demand
 The pertinent provisions of the MSC by-laws:
o Sec 10. Special Meetings—x x x called by the President or by the BOD or upon written request
of the stockholders representing not less than 100 shares
 From the foregoing, only the PRESIDENT and the BOD are authorized by the by-laws to call a special
meeting
o In cases where the person authorized to call a meeting refuses or fails to call a meeting, then
the STOCKHOLDERS representing at least a 100 shares, upon written request may file a
petition to call the meeting
 In the case at bar…
o The 1997 special meeting was called neither by the President nor by the BOD
o Nowhere in the by-laws does it state that the MSCOC is authorized to exercise corporate
powers, such as the power to call a special meeting, which is solely vested by law and MSC by-
laws on the President or the BOD
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o MSCOC is neither empowered by law nor the by-laws to call a meeting and the subsequent
ratification made by the stockholders did NOT cure the substantive infirmity, the defect having
set in at the time the void act was done—the defect goes in to the very authority of the person
who made the call for the meeting
 PROPER REMEDY: The case would have been different if the petitioning stockholders went directly to
the SC and sought its assistance to call a special stockholders’ meeting citing the previous refusal of
the Corp Secretary to call a meeting
o SEC can assume jurisdiction and issue and order to the petitioning stockholder to call a
meeting pursuant to its regulatory and administrative powers to implement the Corp
Code (Sec. 50 Corp Code)
 Every corporation has the inherent power to adopt by-laws for its internal government, and to
regulate the conduct and prescribe the rights and duties of its members towards itself and
among themselves in reference to the management of its affairs
o The by-laws of a corporation are its own private laws which substantially have the same effect
as the laws of the corporation; they are in effect written into the charter
o They become part of the fundamental law of the corporation with which the corporation and its
directors and officers must comply
o GENERAL RULE: a corporation, through its BOD, should act in the manner and within the
formalities, if any, prescribed in its charter or by the general law
 Therefore the directors must act as a body in a meeting called pursuant to the law or the
corporation’s by-laws, otherwise, any action taken therein may be questioned by the
objecting director or shareholder
 Based from the foregoing, the Court ruled that Bernas’ stance that the subsequent stockholder’s
meetings were invalid is INCORRECT
o In the case at bar…
 Sec. 8 of the MSC by-laws there was no specific requirement for a special meeting to be
held
 Thus the 1998 and 1999 Stockholders’ Meeting were valid
 Further the SEC supervised the 1999 Meeting that gave rise to the presumption that the
corporate officers who won the election were duly elected to their positions and therefore
can be rightfully considered as de jure officers
 As de jure officers, they can lawfully exercise function and legally perform acts
within the scope of its business EXCEPT THE RATIFICATION OF ACTIONS
THAT ARE DEEMED VOID FROM THE BEGINNING (the 1997 Meeting)

b. Amendments and Revisions of By-laws

Section 48. Amendments to by-laws. - The board of directors or trustees, by a majority vote thereof, and the
owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-
stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-
laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of
the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend
or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or
trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever
stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in
non-stock corporations, shall so vote at a regular or special meeting.

Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to
the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the
corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange
Commission the same to be attached to the original articles of incorporation and original by-laws.

The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange
FLAMENOTES: CORPORATION LAW- ATTY. HOFILENA 1
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Commission of a certification that the same are not inconsistent with this Code. (22a and 23a)

Pena v Court of Appeals

Facts:

 1962—the Pampanga Bus Company (PAMBUSCO) took out a loan from the DBP
o PAMBUSCO used the parcels of land it owns to secure the loan
 October 1974—due to PAMBUSCO’s non-payment, DBP foreclosed the parcels of land
o Pena was the highest bidder
 November 1974—the BOD of PAMBUSCO had a meeting
o The meeting was attended by only 3 out of 5 Directors
o In the said meeting, the Board, through a resolution, authorized one of the directors, Atty.
Briones, to assign the properties of PAMBUSCO
 Pursuant to the resolution, Briones assigned PAMBUSCO’s assets to Marcelino Enriquez
o Enrquez, knowing that the properties were previously mortgaged and foreclosed, exercised
PAMBUSCO’s right to redeem
 1975—Enriquez redeemed the said properties and thereafter he sold them to Rising Yap
 Rising Yap then registered the properties under his name. He then demanded Pena to vacate the
properties. Pena refused to do so hence Yap filed a complaint
 Pena argues that Yap acquired no legal title over the property because the board resolution issued by
PAMBUSCO in November 1974 is void
o It is void because the resolution was issued without a quorum; that there was no quorum
because under the by-laws of PAMBUSCO, a quorum constitutes the presence of 4 out of 4
directors yet the meeting was only attended by 3 directors
o Because of such, the authority granted to Briones to assign the properties were void and the
subsequent assignment effected by him was void as well
o Enriquez acquired no legal title hence Yap acquired no legal title as well

Issue: Whether the board resolution is valid—No

Held:

 By-laws are the laws of the corporation


 In the case at bar, PAMBUSCO”s by-laws provides that a quorum consists of at least 4 directors
o Hence, the meeting attended by only 3 directors did not comply with the requirement expressed
in its by-laws
o Consequently, the 3 directors were not able to come up with a valid resolution which could bind
the corporation
 Pena, even though a third person, can question the board resolution
o The resolution is likened to a contract
o Under the law, a person who is not a party to the contract may initiate an action for the nullity of
the contract if he or she is prejudiced in his or her rights with respect to one of the contracting
parties, and can show the detriment which would positively result to him or her from the contract
in which he or she had no intervention
 The sale of the properties of PAMBUSCO did not comply with the procedure laid down by the
Corporation Law
o Under the law, the sale or disposition of substantially all properties of the corporation
requires, in addition to proper board resolution, the affirmative votes of the stockholders
holding at least 2/3 of the voting power in the corporation in a meeting duly called for
that purpose
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o In the case at bar…
 The questioned resolution was NOT confirmed at a subsequent stockholders meeting
duty called for the purpose by the affirmative votes of the stockholders holding at least
2/3 of the voting power of the corporation

China Banking Corp v CA

Facts:

 1974—Calapatia, a stockholder of Valley Gold & Country Club (VGCCI) pledged his stock certificate to
China Banking Corporation (CBC)
 CBC wrote VGCCI requesting that the pledge agreement be recorded in its books
o VGCCI then replied that the deed of pledge executed by Calapatia in CBC’s favor was duly
noted in its corporate books
 1983—Calapatia obtained a loan of P20K from CBC, the payment of such was secured by the same
pledge existing between Calapatia and CBC involving the stock certificate
 Calapatia failed to pay. CBC then filed a petition for extrajudicial foreclosure of the stock certificates
before a Notary Public
o CBC requested the Notary Public to conduct a public auction sale of the pledged stock
 1985—CBC informed VGCCI of the foreclosure proceedings and requested that the pledged stock be
transferred to its name and the same be recorded in the corporate books
o HOWEVER, VGCCI wrote CBC expressing its inability to accede to CBC’s request in view of
Calapatia’s unsettled accounts with the club
 Despite all of this, the Notary Public held a public auction and CBC emerged the highest bidder for the
pledged stock. Consequently, CBC was issued the corresponding certificate of sale
 VGCCI sent Calapatia a notice demanding full payment of his overdue account in the amount of P18k
o Said notice was followed by a demand letter for the same amount and another notice in 1986 for
the amount of P23K
 1986—VGCCI caused to be published in the newspaper Daily Express a notice of auction sale of a
number of stock certificates
o Included in the auction was Calapatia’s own share of stock
 Through a letter, VGCCI informed Calapatia of the termination of his membership due to the sale of his
share of stock in the said auction
 CBC advised VGCCI that it is the new owner of Calaptia’s Stock Certificate by virtue of being the
highest bidder in an earlier public auction and requested that a new stock certificate of stock be issued
in its name
 1990—VGCCI replied that “for reason of delinquency” Calapatia’s stock was sold at the public
auction held by it for P25K
 CBC protested the sale by VGCCI of the subject share of stock and thereafter filed a case with the RTC
for the nullification of the auction held by VGCCI and for the issuance of a new stock certificate in its
name
 RTC dismissed the complaint for lack of jurisdiction
o Court held that the case involves an intra-corporate dispute
 CBC then filed a complaint with the SEC for the nullification of the sale of Calapatia’s stock by VGCCI
and the cancellation of any new stock certificate issued pursuant thereto
 1992—SEC decided in favor of VGCCI
o SEC held considering that the said share is delinquent (kasi di nagbabayad si Calapatia),
VGCCI had valid reason not to transfer the share in the name of CBC in the books of VGCCI
until liquidation of delinquency
 CBC appealed to the SEC en banc which reversed the ruling of the SEC hearing officer
o SEC en banc held that CBC has a prior right over the pledged share and because of the
pledgor’s failure to pay the principal debt upon maturity

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o CBC can proceed with the foreclosure of the pledged share declaring that the auction held by
VGCCI as null and void
o It ordered VGCCI to issue another membership certificate to CBC
 VGCCI then appealed to the CA. CA set aside the decision of the SEC en banc holding that the case
was not an intra-corporate controversy

Issue: Whether CBC is bound by VGCCI’s by laws—No

Held:

 In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at
the time the transaction or agreement between said third-party and the shareholder was entered
into
 In the case at bar…
o At the time the pledge agreement was executed, VGCCI could have easily informed CBC of its
by-laws when it sent notice formally recognizing CBC as pledgee of one of its shares registered
in Calapatia’s name
o CBC’s belated notice of said by-laws at the time of foreclosure will NOT suffice
 By-law are the rules and regulations or private laws enacted by the corporation to regulate,
govern and control its own action, affairs and concerns and its stockholders or members and
directors and officers with relation thereto and among themselves in their relation to it
o In other words, by-laws are the relatively permanent and continuing rules of action
adopted by the corporation for its own government and that of the individuals
composing it and having the direction, management and control of its affairs and
activities
o PURPOSE: to regulate the conduct and define the duties of the members towards the
corporation and among themselves; they are self-imposed and, although adopted
pursuant to statutory authority, have no status as public law
 it is the generally accepted rule that third personas are not bound by by-laws, except when they
have knowledge of the provisions either actually or constructive
 In the case at bar…
o For the said general rule to be applicable VGCCI must have had acquired knowledge of the by-
laws at the time the pledge agreement was contracted
o Knowledge of said provisions, either actual or constructive, AT THE TIME OF VGCCI’S
FORECLOSURE will NOT affect CBC’s right over the pledged share (it was too late…)
o CBC was never informed of Calapatia’s unpaid accounts and the restrictive provisions in
VGCCI’s by-laws
 Further, Sec. 63 of the Corp Code CANNOT be invoked
o Sec. 63 “no shares of stock against which the corporation holds any unpaid claim shall be
transferrable in the books of the corporation”
o The term “unpaid claim” refers to “any unpaid claim arising from unpaid subscription, and
not to any indebtedness which a subscriber or stockholder may owe to the corporation
arising from any other transaction”
 In the case at bar…
o The subscription for the share in question has been fully paid as evidenced by the issuance of
the membership certificate
o What Calapatia owed the corporation were the monthly dues. Hence Sec. 63 does not apply

Corporate Powers and Authority

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1. Corporate Power and Capacity

Civil Code: Article 46. Juridical persons may acquire and possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and regulations of their organization.
(38a)

Section 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power
and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the
certificate of incorporation;

3. To adopt and use a corporate seal;


4. To amend its articles of incorporation in accordance with the provisions of this Code;

5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in
accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to
sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if
it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with
such real and personal property, including securities and bonds of other corporations, as the transaction of the
lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed
by law and the Constitution;

8. To enter into merger or consolidation with other corporations as provided in this Code;

9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of partisan political activity;

10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and
employees; and

11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as
stated in the articles of incorporation. (13a)

Section 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise any
corporate powers except those conferred by this Code or by its articles of incorporation and except such as are
necessary or incidental to the exercise of the powers so conferred. (n)

2. Express Powers

a. Enumerated Powers (see. Art. 36)

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b. Extend or Shorten Corporate Term

Section 37. Power to extend or shorten corporate term. - A private corporation may extend or shorten its term
as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees
and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital
stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the
proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at
his place of residence as shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any
dissenting stockholder may exercise his appraisal right under the conditions provided in this code. (n)

Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or restricting the
rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to
those of outstanding shares of any class, or of extending or shortening the term of corporate existence;

c. Increase or Decrease in Capital Stock

Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No
corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness
unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the
purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital
stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or
diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered,
must be addressed to each stockholder at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by
the chairman and the secretary of the stockholders' meeting, setting forth:

(1) That the requirements of this section have been complied with;

(2) The amount of the increase or diminution of the capital stock;

(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof
actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital
stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash
or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if
such increase is for the purpose of making effective stock dividend therefor authorized;

(4) Any bonded indebtedness to be incurred, created or increased;

(5) The actual indebtedness of the corporation on the day of the meeting;

(6) The amount of stock represented at the meeting; and

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(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing
of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded
indebtedness shall require prior approval of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed
with the Securities and Exchange Commission and attached to the original articles of incorporation. From and
after approval by the Securities and Exchange Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing
of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities
and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of
the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has
been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in
actual cash to the corporation or that there has been transferred to the corporation property the valuation of
which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the
capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by
a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called
for the purpose.

Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall
have the authority to determine the sufficiency of the terms thereof. (17a)

d. Incur Create or Increase Bond Indebtedness (see Sec. 38 last paragraph)

e. Sell or Dispose Assets

Section 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell,
lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets,
including its goodwill, upon such terms and conditions and for such consideration, which may be money,
stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of
directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least
to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose. Written
notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder
or member at his place of residence as shown on the books of the corporation and deposited to the addressee
in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may
exercise his appraisal right under the conditions provided in this Code.

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose
for which it was incorporated.

After such authorization or approval by the stockholders or members, the board of directors or trustees may,
nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of
property and assets, subject to the rights of third parties under any contract relating thereto, without further
action or approval by the stockholders or members.

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Nothing in this section is intended to restrict the power of any corporation, without the authorization by the
stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its
property and assets if the same is necessary in the usual and regular course of business of said corporation or
if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of
its remaining business.

In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the
trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by
this section.

f. Invest Corporate Funds for Non-Primary Purpose Endeavor

Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. -
Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or
business or for any purpose other than the primary purpose for which it was organized when approved by a
majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock
corporations, at a stockholder's or member's meeting duly called for the purpose. Written notice of the
proposed investment and the time and place of the meeting shall be addressed to each stockholder or member
at his place of residence as shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have
appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is
reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval
of the stockholders or members shall not be necessary. (17 1/2a)

De la Rama v Ma-ao Sugar Central Co.

Facts:

 This case is a representative or derivative suit filed by 4 minority stockholders against the Ma-ao Sugar
Cenral and Amado Araneta and 3 other directors of the corporation
 The complaint alleged, among others, illegal and ultra vires acts consisting of self-dealing irregular
loans, and unauthorized investments
 1950—the Mao-ao Sugar Central Co. Inc. through its president, Amado Araneta, subscribed for
P300,000 worth of capital stock of the Philippine Fiber Processing Co. Inc.
o Payments for the said subscription were made on 3 separate occasions
 At the time the first two payments were made there was no board resolution authorizing the investment.
It was only on Nov. 26, 1951 (in time for the 3rd payment) that the President of Ma-ao Sugar Central Co.
Inc., was so authorized by the BOD
 Additionally 355,000 shares of stock of the same Philippine Fiber Processing Co., Inc., owned by Luzon
Industrial Corporation, were transferred to Ma-ao Sugar Central
o Again this “investment” was made without prior board resolution having been only subsequently
approved
 De la Rama et al. now contends that even assuming arguendo that said board resolutions are valid, the
transaction is still wanting in legality because no resolution has been approved by the affirmative vote
of 2/3 of the stockholders holding shares in the corporation as required by the Corporation Law

Issue: Whether the affirmative vote of 2/3 of the stockholders is needed for the “investment” made by Ma-ao--
No

Held:

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 A private corporation, in order to accomplish its purpose as stated in its AOI, and subject to the
limitations imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge
or dispose of shares, bonds, securities, and other evidences of indebtedness of any domestic
corporation
o Such an act, if done in the pursuance of the corporate purpose, DOES NOT NEED the
approval of the stockholders
o BUT when the purchase of shares of another corporation is done solely for investment and NOT
to accomplish the purpose of its incorporation, the vote of approval of the stockholders is
NECESSARY
 In the case at bar…
o The purchase of the shares from Philippine Fiber must be subject to the limitations established
by the Corporation Law:
 That no agricultural or mining corporation shall in anywise be interested in any other
agricultural or mining corporation
 That a non- agricultural or non-mining corporation shall be restricted to own not more
than 15% of the voting stock of any agricultural or mining corporation
 That such holdings shall be solely for investment and not for the purpose of bringing
about a monopoly in any line of commerce or combination in restraint of trade
 The Corporation Law expressly provided that a private corporation has the power to invest any
of its corporate funds in any other corporation or business, or for any purpose other than the
main purpose for which it was organized, PROVIDED that its board of directors has been so
authorized in a resolution by the affirmative vote of the stockholders holding shares in the
corporation entitling them to exercise at least 2/3 of the voting power on such a proposal at a
stockholders’ meeting called for that purpose, and provided further that no agricultural or
mining corporation shall in anywise be interested in any other agricultural mining corporation.
**When the investment is necessary to accomplish its purpose or purposes as stated in its AOI,
the approval of the stockholders is NOT necessary
 In the case at bar…
o Phil Fiber was engaged in the manufacture of jute-bags used in packing sugar
o Therefore, Ma-ao’s acquisition of shares from the said company falls within the implied powers
of the former as part of its primary purpose and DOES NOT need ratification by stockholders

g. Declare Dividends

Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends
out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on
delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while
stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not
less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the
purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of
their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs
approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with
any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent,
and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation, such as when there is need for special
reserve for probable contingencies. (n)

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h. Enter into Management Contracts

Section 44. Power to enter into management contract. - No corporation shall conclude a management contract
with another corporation unless such contract shall have been approved by the board of directors and by
stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the
members in the case of a non-stock corporation, of both the managing and the managed corporation, at a
meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the
same interest of both the managing and the managed corporations own or control more than one-third (1/3) of
the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the
members of the board of directors of the managing corporation also constitute a majority of the members of the
board of directors of the managed corporation, then the management contract must be approved by the
stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock
entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No
management contract shall be entered into for a period longer than five years for any one term.

The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes
to manage or operate all or substantially all of the business of another corporation, whether such contracts are
called service contracts, operating agreements or otherwise: Provided, however, That such service contracts
or operating agreements which relate to the exploration, development, exploitation or utilization of natural
resources may be entered into for such periods as may be provided by the pertinent laws or regulations. (n)

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